Average base rate of commercial banks falls below five percent

The average base interest rate for commercial banks in Nepal has dropped to 4.97 percent, marking a historic low for the country's banking sector. This decline is driven by a significant surge in deposit collections coupled with sluggish credit demand from the private sector. For commercial lenders, this shift signals a potential reduction in lending rates but also highlights a growing challenge in mobilizing idle liquidity effectively.

According to reports from 20 commercial banks, the average base rate fell to 4.97 percent in the final month of the 2025/26 fiscal year, likely the first time it has dipped below the five percent threshold in Nepal’s history. This trend is a direct result of banks successively lowering interest rates on deposits to manage costs as investment expansion remains stagnant. Of the reporting institutions, nine banks now operate with base rates below five percent, with Standard Chartered Bank Nepal recording the lowest rate at 4.21 percent. Conversely, NIC Asia Bank reported the highest base rate at 6.04 percent, making it the only commercial lender above the six percent mark.

The banking sector is currently grappling with excessive liquidity as deposit growth far outpaces loan issuance. Total deposits reached over Rs 7.254 trillion, an increase of Rs 723 billion from Rs 6.530 trillion recorded 11 months prior. However, credit mobilization has been notably weak, with loan issuance rising by only Rs 289 billion to reach Rs 5.263 trillion during the same period. This discrepancy means that less than 40 percent of new deposits were successfully converted into loans, reflecting a subdued appetite for credit in the private sector despite the lower cost of borrowing.

Under Nepal Rastra Bank’s regulatory framework, which sets a maximum credit-deposit (CD) ratio of 90 percent, commercial banks are estimated to be holding approximately Rs 1.3 trillion in idle funds. The overall industry CD ratio has declined from 76.18 percent to 72.42 percent, with some individual institutions seeing their ratios drop as low as 50 percent. This high level of liquidity and the resulting drop in base rates suggest that while borrowing costs are decreasing, the primary challenge for the commercial banking market remains the lack of viable investment opportunities and credit demand to absorb available capital.